© 2010 South-Western, Cengage Learning, Inc. All rights reserved.

The Decision Making Process The act of choosing one alternative from among a set of alternatives. Decision-Making Process: Recognizing and defining the decision situation Identifying alternatives Choosing the “best” alternative Putting the alternative into practice © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

The Nature of Decision Making Decision-Making Process (cont’d) An effective decision optimizes some set of factors such as profits, sales, employee welfare, and market share. Managers make decisions about both problems and opportunities. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.1 Steps in the Rational Decision-making Process Detail Example 1. Recognizing and defining the decision situation Some stimulus indicates that a decision must be made. The stimulus may be positive or negative. A plant manager sees that employee turnover has increased by 5 percent. 2. Identifying alternatives Both obvious and creative alternatives are desired. In general, the more important the decision, the more alternatives should be generated. The plant manager can increase wages, increase benefits, or change hiring standards. 3. Evaluating alternatives Each alternative is evaluated to determine its feasibility, its satisfactoriness, and its consequences. Increasing benefits may not be feasible. Increasing wages and changing hiring standards may satisfy all conditions. 4. Selecting the best alternative Consider all situational factors and choose the alternative that best fits the manager’s situation. Changing hiring standards will take an extended period of time to cut turnover, so increase wages. 5. Implementing the chosen alternative The chosen alternative is implemented into the organizational system. The plant manager may need permission from corporate headquarters. The human resource department establishes a new wage structure. 6. Following up and evaluating the results At some time in the future, the manager should ascertain the extent to which the alternative chosen in step 4 and implemented in step 5 has worked. The plant manager notes that, six months later, turnover dropped to its previous level © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Types of Decisions Programmed Decision Nonprogrammed Decision is a fairly structured decision or one that recurs with some frequency or both. Example: Starting your car in the morning. Nonprogrammed Decision is relatively unstructured and occurs much less often a programmed decision. Example: Choosing a vacation destination. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Decision-Making Conditions Decision Making Under Risk Decision Making Under Uncertainty Decision Making Under Certainty Conditions Affecting Decision Making © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Decision-Making Conditions Decision Making Under Certainty The decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. Decision Making Under Risk The availability of each alternative and its potential payoffs and costs are all associated with risks. Decision Making Under Uncertainty The decision maker does not know all the alternatives, the risks associated with each, or the consequences of each alternative. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.1 Decision-Making Conditions The decision maker faces conditions of… Uncertainty Risk Certainty Level of ambiguity and chances of making a bad decision Lower Moderate Higher © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.2 The Classical Model of Decision Making When faced with a decision situation, managers should… obtain complete and perfect information eliminate uncertainty evaluate everything logically and rationally …and end up with a decision that best serves the interests of the organization © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.3 Evaluating Alternatives in the Decision-making Process Is the alternative feasible? Eliminate from consideration satisfactory? Are the alternative’s consequences affordable? Retain for further Yes No © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.4 The Administrative Model of Decision Making When faced with a decision situation, managers actually… use incomplete and imperfect information are constrained by bounded rationality tend to satisfice …and end up with a decision that may or may not serve the interests of the organization © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Behavioral Aspects of Decision Making Satisficing Bounded rationality Coalitions Escalation of commitment Intuition Risk propensity Influences on Decision Making © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Behavioral Aspects of Decision Making Bounded Rationality Decision makers are limited by their values and unconscious reflexes, skills, and habits. Satisficing The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem. Coalition A positive or negative political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Behavioral Aspects of Decision Making (cont’d) Intuition An innate belief about something without conscious consideration. Escalation of Commitment Staying with a decision even when it appears to be wrong. Risk Propensity The extent to which a decision maker is willing to gamble when making a decision. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Management Challenge Question How could a coalition lead to escalation of commitment? What can be done to prevent or avoid the escalation? © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Managerial Ethics and Decision Making Individual Ethics Managerial Ethics Employees Other economic agents Organizational Ethics © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Ethics and Decision Making Managerial Ethics Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics. Components of managerial ethics: Relationship of the firm to employees Employees to the firm The firm to other economic agents © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Group and Team Decision Making Interacting group or team Delphi groups Nominal group Forms of Group Decision Making © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Group and Team Decision Making Forms of Group Decision Making Interacting group or team Consists of an existing group or newly formed team interacting and then making a decision. Delphi groups Developing a consensus of expert opinion from a panel of experts who individually contribute through a moderator. Nominal groups Generating ideas through the individual contributions of alternatives that are winnowed down to reach a decision. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

9.2 Advantages and Disadvantages of Group and Team Decision Making More information and knowledge are available. More alternatives are likely to be generated. More acceptance of the final decision is likely. Enhanced communication of the decision may result. Better decisions generally emerge. The process takes longer than individual decision making, so it is costlier. Compromise decisions resulting from indecisiveness may emerge. One person may dominate the group. Groupthink may occur. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

Making Group and Team Decisions More Effective Being aware of the pros and cons of having a group or team make a decision. Setting deadlines for when decisions must be made. Avoiding dominance problems by managing group membership. Having each group member individually critically evaluate all alternatives. Not making your position known too early. Appointing a group member to be a “devil’s advocate.” Holding a follow-up meeting to recheck the decision. © 2010 South-Western, Cengage Learning, Inc. All rights reserved.